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Class 8

Class 8. Managing Cash Flow Financial Projections. Managing Cash Flow. Cash  Profits. Remember: Cash and profits are not the same! Young, growing companies are “cash sponges.” A business can be earning a profit and be forced to close because it runs out of cash!

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Class 8

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  1. Class 8 • Managing Cash Flow • Financial Projections

  2. ManagingCash Flow

  3. Cash  Profits • Remember: Cash and profits are not the same! • Young, growing companies are “cash sponges.” • A business can be earning a profit and be forced to close because it runs out of cash! • Cash management – forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly.

  4. Cash Management • Survey: “Greatest financial obstacle?” Uneven cash flow • Study: 68% of small businesses perform no cash flow analysis at all! • First step: Understanding a company’s cash flow cycle – the time lag between paying suppliers for merchandise and receiving payment from customers.

  5. The Cash Flow Cycle Deliver Goods Order Goods Receive Goods Sell Goods* Customer Pays** Send Invoice Pay Invoice Day 1 15 40 280 218 221 230 50 14 25 178 3 9 Cash Flow Cycle = 240 days ** Based on Average Collection Period: 365 days = 50 days 7.31 times/year * Based on Average Inventory Turnover: 365 days = 178 days 2.05 times/year

  6. Another Approach • I have posted in the Course Documents section of BlackBoard an Excel spreadsheet that supplements the Cash Flow Cycle as presented in the previous slide and in the text • There are some additional questions based on changing assumptions for the business.

  7. Operating Cycle • The Operating Cycle is also covered in the spreadsheet; it’s just another way to measure business performance • The basic Operating Cycle equation is: • Operating Cycle = Days Receivable + Days Inventory – Days Payable – Days Accruals • Just for clarification, Days Accruals tends to be payroll-related; i.e. if employees are paid twice a month there may be a week or 2 of payroll accrued, but not yet paid out

  8. At the Bottom of the Page… • The last part of the spreadsheet shows how to ‘reverse engineer’ some of the information and estimate Receivables, Inventory, Payables, and Accruals; this can be helpful when going over pro forma projections to make sure that these balances are consistent with a sales forecast.

  9. Five Cash Management Roles of an Entrepreneur • Cash Finder • Cash Planner • Cash Distributor • Cash Collector • Cash Conserver

  10. The Cash Budget • A “cash map,” showing the amount and the timing of a firm's cash receipts and cash disbursements over time. • Predicts the amount of cash a company will need to operate smoothly. • A helpful tool for visualizing the firm's cash receipts and cash disbursements and the resulting cash balance.

  11. Preparing a Cash Budget • Determine a Minimum Cash Balance • Forecast Sales • Forecast Cash Receipts • Forecast Cash Disbursements • Estimate End-of-Month Cash Balance

  12. Determine a Minimum Cash Balance • Remember Goldilocks, the Three Bears, and the porridge: • Not too much... • Not too little... • but a cash balance that's just right ... for you!

  13. Forecast Sales • The heart of the cash budget. • Sales are ultimately transformed into cash receipts and cash disbursements. • Prepare three sales forecasts: • Most Likely • Pessimistic • Optimistic

  14. Sales Forecast for a Start-Up Example: Number of cars in trading zone 84,000 x Percent of imports x 24% = Number of imported cars in trading zone 20,160 Number of imports in trading zone 20,160 x Average expenditure on repairs x $485 = Total import repair sales potential $9,777,600 Total import repair sales potential $9,777,600 x Estimated market share x 9.9% = Sales estimate $967,982

  15. Forecast Cash Receipts • Record all cash receipts when actually received (i.e. the cash method of accounting). • Determine the collection pattern for credit sales; then add cash sales.

  16. Forecast Cash Disbursements • Start with those disbursements that are fixed amounts due on certain dates. • Review the business checkbook to ensure accurate estimates. • Add a cushion to the estimate to account for “Murphy's Law.” • Don’t know where to begin? Try making a daily list of the items that generate cash and those that consume it.

  17. Estimate End-of-Month Balance • Take Beginning Cash Balance... • Add Cash Receipts... • Subtract Cash Disbursements • Result is Cash Surplus or Cash Shortage (Repay or Borrow?)

  18. Benefits of Cash Management • Increase amount and speed of cash flowing in • Reduce the amount and speed of cash flowing out • Develop a sound borrowing and repayment program • Impress lenders and investors • Reduce borrowing costs by borrowing only when necessary

  19. Benefits of Cash Management • Take advantage of money-saving opportunities such as cash discounts • Make the most efficient use of available cash • Finance seasonal business needs • Provide funds for expansion • Plan for investing surplus cash

  20. The "Big Three" of Cash Management • Accounts Receivable • Accounts Payable • Inventory

  21. Accounts Receivable • About 90% of industrial and wholesale sales are on credit, and 40 percent of retail sales are on account. • Survey of small companies across a variety of industries: 77% extend credit to their customers.

  22. Accounts Receivable • Remember: “A sale is not a sale until you collect the money.” • The goal with accounts receivable is to collect your company’s cash as fast as you can.

  23. Beating the Cash Crisis Accounts Receivable • Establish a firm credit-granting policy. • Screen credit customers carefully. • When an account becomes overdue, take action immediately. • Add finance charges to overdue accounts (check the law first!). • Develop a system of collecting accounts. • Send invoices promptly.

  24. Accelerating Accounts Receivable • Ask customers to fax or e-mail orders • Send invoices when goods are shipped • Highlight the due date on invoices • Restrict customers’ credit until past-due bills are paid • Deposit checks and credit card receipts daily

  25. Accelerating Accounts Receivable • Identify the top 20% of your customers and monitor them closely • Ask customers for up-front payments • Watch for signs that a customer may be about to declare bankruptcy • Consider using a lockbox service • Track the results of your company’s collection efforts

  26. Beating the Cash Crisis Accounts Payable • Stretch out payment times as long as possible without damaging your credit rating. • Verify all invoices before paying them. • Take advantage of cash discounts.

  27. The Cost of Foregoing a Cash Discount$1,000 invoice2/10, net 30 $20 $980 $1,000 Amount 10 Day 0 30 20 days I P x T $20 $980 x 20/360 R = = = 36.7%

  28. Beating the Cash Crisis Accounts Payable • Negotiate the best possible terms with your suppliers. • Be honest with creditors; avoid the “the check is in the mail” syndrome. • Schedule controllable cash disbursements to come due at different times. • Use credit cards wisely.

  29. Beating the Cash Crisis Inventory • Monitor it closely; it can drain a company's cash. • Avoid inventory overbuying. It ties up valuable cash at a zero rate of return. • Arrange for inventory deliveries at the latest possible date. • Negotiate quantity discounts with suppliers when possible.

  30. Avoiding the Cash Crunch • Consider bartering, exchanging goods and services for other goods and services, to conserve cash. • Trim overhead costs. For example: • Lease rather than buy • Avoid nonessential cash outlays • Negotiate fixed loan payments to coincide with your company’s cash flow

  31. Avoiding the Cash Crunch (Continued) • Trim overhead costs. For example: • Buy used equipment • Look for simple ways to cut costs • Hire part-time employees and freelancers • Develop an internal security system • Devise a method for fighting check fraud • Change shipping terms • Switch to zero-based budgeting • Keep your business plan current • Invest surplus cash

  32. Though my bottom line is black, I am flat upon my back;My cash flows out, and the customers pay slow.The growth of my receivables is almost unbelievable;The result is certain - unremitting woe!And I hear the banker utter that ominous low mutter,“Watch cash flow.” - Herbert S. Bailey

  33. Next Week • Exam II – 16 October 03 • Unless you hear otherwise, the Exam will be available on the BlackBoard from 6 PM until 8 PM on Thursday October 16th; • It is your responsibility to complete the Exam before the expiration time on 16 October! I will be on-line during the exam time to deal with any questions and issues – you can e-mail me or use AIM (UNCGMGT470) • You can use the book, notes, Excel/Financial calculator, PowerPoint slides, etc. for the exam (but remember, the questions will be more difficult since it is an on-line test!) • Enjoy your Fall Break!!!!!

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